Transforming the attractiveness of investment tools with Trump's extreme pricing methods

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"At least since2011, Trump's organization has been inflating the cost of real estate."

She manipulated financial statements and even used what Donald Trump himself described as a "useless clause" in statements that, in his view, would allow his company to escape unfair valuations, according to testimony in a civil fraud trial that began on Monday.

But for millions of investors who are taking the straight path, the fine line between the alleged fraud of Trump and the more ambiguous aspects of real estate valuation and reporting is always present, if not entirely clear, said lawyers and investors to Inman.

"It seems like you are being encouraged to evaluate the building at the lowest possible cost."

Inman confessed that Tad Wong, a real estate investor and co-CEO of @properties Christie's International Real Estate, referred to the pressure that forces many investors to adjust their valuations depending on whether the information is intended for a potential buyer's agent, lender, insurer, or the Federal Tax Service. "You're trying to create a different narrative for the property so that it has a higher value, so that when your lender looks at it, they will offer you a better loan package or better terms," Wong added.

New York judge Arthur Engoron ruled last week that by ignoring independent assessments of several properties in his extensive portfolio in recent years, Trump inflated his net worth by up to $2.2 billion, joining the ranks of real estate investors who crossed the line into fraudulent behavior. New York prosecutors stated that the former president received a number of benefits based on misleading information about the buildings in his real estate empire.

However, although Trump's case may be one of the most obvious, the former president is just the latest investor to violate state or federal laws using aggressive valuation tactics.

Inman Bennett Gershman, a law professor at Pace University and former New York prosecutor, stated. However, the legal proceedings in the Trump case may reveal how far investors can go before facing similar legal consequences. "This case with Trump is truly breathtaking because you don't see such large developers or real estate operators engaging in such long-term and quite transparent documentation that remarkably inflates value," he said. "We're not talking about minor overstatements or overvaluations. This inflated value is enormous."

As the Trump legal proceedings unfold, investors and attorneys shared with Inman the legal pitfalls that investors face when trying to report and assess real estate.

In real estate, there is a saying: a house or building is worth as much as the market is willing to pay for it.

At first glance, this is true for both residential and commercial real estate. However, commercial real estate differs slightly from residential real estate in the way buildings are evaluated, said Chad Littell, national director of capital markets analytics for CoStar. "If you're buying a residential property, there is a lot of legislation in the industry that protects consumers," Littell said. "But in the commercial sector... there can be very different opinions on what value is for a specific property."

Commercial real estate relies on expert opinions about value, which are determined by brokers. However, the owner may have a different opinion and believe that the building is worth more or less. According to court documents, Trump's buildings were often appraised by firms like Cushman & Wakefield, but Trump's financial reports indicated a much higher value. For example, 40 Wall Street was appraised in 2011 and 2012 in the range of $200 to $220 million. At the same time, the Trump Organization reported values of $524.7 and $527.2 million for those years. Trump's Mar-a-Lago resort, which he referred to as the Winter White House during his time in office, was appraised from 2011 to 2023 in the range of $18 to $27.6 million. During those same years, Trump reported values ranging from $426.5 to $612 million.

Lawrence Moens, a Florida real estate broker representing high-income clients, stated that Trump's valuations were "conservative," according to court documents.

But other experts note that investors typically conduct their own due diligence rather than relying on the seller to determine the true value of the building. "You would be laughed at if you publicly admitted that you use the seller's statements and trust them," said Alexander Goldfarb, a senior equity analyst at investment bank Piper Sandler. "Everyone does their homework."

The value of commercial real estate is determined, among other things, by how much money it can generate for investors who own the buildings, as well as a set of macroeconomic factors.

For example, old office buildings are being sold at discounts of more than half on markets across the country due to record-low occupancy, caused in part by the pandemic and partly due to the shift to new buildings. Those new buildings that can attract tenants continue to sell at high prices. Investors are eager to generate cash from commercial real estate or monthly income from rent and other sources of income after expenses are accounted for.

One of the recent cases highlighted how investors can commit fraud by falsifying documents in ways that homeowners cannot when selling their property to other consumers. The executive director of a California real estate firm pleaded guilty to fraud last year, admitting that he misled lenders by inflating the income from properties owned by his company, according to the Department of Justice. Prosecutors stated that Tyler Ross and his staff provided mortgage lenders with fake financial documents that made underperforming properties appear more profitable by removing or reducing actual expenses. On paper, the buildings looked more profitable than they really were, giving Ross a better chance of securing new or favorable loan terms. "Honest financial reporting is the foundation of our banking and credit system," said Don N. Ayscough, the U.S. Attorney for the Eastern District of Michigan, in a statement. "My office will not hesitate to prosecute those who lie to commit financial crimes, regardless of their positions."

Such cases sometimes highlight